Appropriate for RBI to wait, act with restraint

A A

Shubhada Rao: Dec 19 2012, 01:28 IST

gradually trending up, rising by close to 17 bps over the last two months. Both the headline and core CPI inflation continue to remain elevated, flirting with double digits. Besides, there still remains a part of WPI inflation which is suppressed on account of second round of electricity tariff hikes. Upside risks to WPI inflation also remain from rupee undoing most of its gains observed between September and October. PMI has already started showing buildup of price pressures, with both input and output prices rising in November after falling substantially in October. As such, there was indeed merit in RBI leaving rates unchanged and sticking to the previous guidance of incremental policy easing in Q4 FY13.

On the liquidity front, the current buildup in liquidity pressure has been due to a combination of advance tax outflows, coinciding with relatively large government balance. Since we expect this stress in liquidity to be temporary, with the quarter end, the government spending coming on board soon, we were of the view of no CRR cut, which is currently at a multi-decade low. Going forward, in my opinion, RBI is likely to calibrate liquidity conditions in accordance with the spending pattern of the government, by using open market operations.

Here on, we expect the moderation in headline inflation to continue steadily, barring December, with WPI inflation easing to 7.25% by March 2013 (below RBI projection of 7.5%). On other hand, growth shows incipient signs of bottoming out, as also validated by YES BANK demand conditions index.

... contd.

Ads by Google

Single Page Format

Previous | 1 | 2 | 3 | Next

Status quo on, RBI points to a Jan rate cut Banks unlikely to cut lending ratesBanks may not cut deposit rates till liquidity stabilises More OMOs if required: Gokarn

Previous Story Interest rate cut needed to boost growth, says Montek Next Story Quick view

Reader's Comments| Post a Comment

Be the first to comment.